Italy Succeeds Placing 1 Year Bill As ECB, China Buying Bonds In Secondary Market

One of the main catalysts for today's European market action was the Italian 1 year Bill issuance which was supposed to set the tone for Italian bond demand, especially since thanks to ISDA's stupidity (which had made it clear CDS will not trigger in any event as the organization is completely spineless), there is no reason to any longer hedge a negative basis at issuance. Well, Italy did pull it off, although at terms that a month ago would have inspired shock within the market.  "The 6.75 billion euro sale was the first test of appetite for Italian paper since a surge in nerves that it will be next to fall in the euro zone's debt crisis due to domestic political tensions and a combination of high public debt and low growth. The gross yield on the 12-month BOT bills rose to 3.67 percent from 2.147 percent at a previous auction in June. This was the highest level since September 2008, according to Reuters calculations on Italian Treasury data. The bid-to-cover ratio fell to 1.55 times from 1.71 in June, when the treasury sold a slightly lower 6 billion euros in total." However, even this data was very suspect after 10 Year Italian-Bund spreads hit a new record wide of 355 bps earlier as the Italian contagion is now fully on. In response, both the ECB and China are now rumored to be scooping up all peripheral bonds in the secondary after a long hiatus as the ECB is on the verge of panicking, side by side with European bond investors, following remarks by Dutch Finance Minister De Jager who said, as predicted yesterday, that a Greek selective default "Is not excluded anymore."

Some comments on the bond auction from Reuters:

"Italy has sold the target amount, which should give the market some relief in the very short term," said Peter Chatwell, a rate strategist at Credit Agricole.

"The yield is much higher than June's auction, reflecting the recent hammering the Italian credit has suffered."

Elsewhere Greece raised 1.625 billion euros in an auction of six-month T-bills on Tuesday to roll over maturing short-term debt, paying lenders a slightly lower yield than in a similar sale in June amid rising debt concerns. There were less foreign investors participating in the sale than a month ago. In other words, the ECB just got more pregnant as more Greek banks "bought" debt only to immediately pledge it back to the ECB in exchange for much needed par capital (despite that the CTDs are trading below 50 cents).

Bottom line: this is just the beginning. And to antiparaphrase Cramer, "Europe is not fine."